Fibonacci Analysis: Master the Basics

MoneyShow's Tom Aspray thinks traders and investors in
all markets can benefit from this timeless analysis technique, which is highly
useful in determining entry and stop levels in multiple time frames and all
market conditions.

One tool that many traders and a majority of investors do not include in
their investment or trading decisions is Fibonacci analysis. Though some have
not been exposed to this type of analysis, many others dismiss it when they find
that it is based on the work of a 12th century mathematician or because they
think it is too complex.

Both traders and investors have trouble finding good price levels to enter
the market and determining where to place their stops. A mistake in either area
can ruin the chances of a profitable outcome, and most fail because they do not
have an objective way to determine either price level.

This is where the most basic level of Fibonacci analysis can be very helpful,
whether you are investing in stocks or ETFs, or even daytrading the forex
market.

Without diving too heavily into the math, Fibonacci analysis is based on a
series of numbers developed by Italian mathematician Leonardo Fibonacci in the
12th century.

From a trading perspective, there are many basic and advanced ways that
Fibonacci numbers can be beneficial to the trader. Suffice it to say that this
series of numbers and the relationship of one number to another in the series
have been found throughout nature. The most notable relationship can be found by
dividing one Fibonacci number by the next one in the series, which will give you
the "Golden Ratio" of 0.618.

There are two primary ways that I use Fibonacci analysis in my trading. One
is to identify or confirm support or resistance levels, and the other is to help
identify price targets. In this article, I will concentrate on identifying
levels of support and resistance.

Often times, a trader will look at a market and realize that when they were
not paying attention, a significant level of support or resistance was broken
and the market has already moved significantly. Fibonacci analysis can be very
helpful in this situation.

Figure 1

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Although this article was originally published in August of 2012, as noted in
the charts for these technology stocks, the principles of fundamentals are
timeless and still just as relevant in analyzing a stock's performance as we
near the end of 2014 , into 2015, and beyond.

The first example is NetFlix, Inc. (NFLX) from late 2008 and early 2009, however, similar
Fibonacci relationships can be found in any liquid market. I have used it on
commodities, stocks, mutual funds, and the forex market for many years and have
found it to be quite valuable.